Ahead of a monster week of economic data and earnings releases the S&P 500 fell 0.85%, the Dow lost 2.6%, and the Nasdaq gained 0.4%
The Stock – Credo (CRDO)
The continued acceleration of the AI data center buildout will require increasingly faster data transmission capabilities, which is a key reason for the strength behind Credo. The California-based company is emerging as a leading high-speed connectivity provider for data centers, delivering a range of solutions including integrated circuits, active electrical cables (AECs) and SerDes chiplets (for handling serial data communication over extremely short distances).
Significantly, Credo’s AEC solutions are fast becoming the standard for in-rack connectivity at speeds of 50G and above, and it enjoys a dominant position in this market, while its digital signal processors (DSPs) are also widely used for optical interconnects in cloud-scale data centers.
In fiscal Q1 (ended July), Credo reported revenue of $60 million that increased by a whopping 70% from the year-ago quarter, along with significant margin improvements. However, while EPS of four cents improved from the year-ago per-share loss, it missed estimates by 2%—and was likely the reason for the stock’s plunge after results were released in early September. But the recovery was swift as investors no doubt considered the many positives in the Q1 report, including the announcement that Credo expects to see a new 10% customer (identified by management as an “emerging hyperscaler”) in the current fiscal Q2.
The company said AECs is currently the main source of revenue and that product line will likely play a crucial role in driving growth in fiscal 2025 and beyond, with production underway for solutions with port speeds of up to 800G. What’s more, Credo said the optical DSP business is “building momentum” and that it expects to ship more DSP units than it has shipped in all previous years combined in 2025. The top brass also expects the rise of generative AI to drive greater demand for its advanced power-efficient, high-speed connectivity solutions and anticipates an “inflection point” across the entire range of its connectivity solutions in 2025, driven by new and existing customers. Wall Street expects triple-digit earnings growth this fiscal year and next; earnings aren’t out until Thanksgiving or so.
Technical Analysis
CRDO’s change of character occurred in May, when earnings propelled it to new highs and pushed the stock higher for a few weeks—but then things got wild, with a sharp plunge with the market in July/August and, after a snap back, another air pocket after the September quarterly report. But against all odds, CRDO has stormed back from that drop, ripping to new price and RP peaks this month and holding firm during the market’s recent consolidation. Stop – 33.5
The Covered Call Trade
Buy Credo (CRDO) Stock at 41, Sell to Open November 40 Strike Calls (exp. 11/15) for $2.70, or a Net Price of 38.3 or less
Static Return: $170 per covered call (4.43%)
Breakeven: 38.3
Covered Call Return (if assigned): $170 per covered call (4.43%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 38.3 or less. (In this case 41 minus 2.70 = 38.3. Or another example is you could pay 40.90 for the stock and sell the call for 2.60, which also equals 38.3)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| ON Holdings (ONON) | 51.9 | 49 | 43.5 | November 50 -- $4.92 | $2.50 |
| Robinhood (HOOD) | 26.2 | 27.5 | 22 | November 27 -- $1.90 | $2.20 |
| Delta Airlines (DAL) | 54.4 | 55 | 46.5 | November 55 - $1.75 | $2.00 |
The next Cabot Profit Booster issue will be published on November 5, 2024.
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